With public finances feeling the pinch, coupled with increasing life expectancy, the future of pensions in the UK is a contentious issue. In order to ease the burden on the public purse, the onus is being placed upon individuals (and their employers) to save for their old age themselves rather than rely on the State Pension. This has led to the government introducing auto-enrolment pensions. Here is what all small business owners need to know:
What is auto-enrolment?
Auto-enrolment means it will be compulsory for Britain’s employers to set up a workplace pension for their employees. Employees will then contribute an amount each month from their pay packets, and their employer will likewise contribute. As the name suggests, employees will be automatically enrolled in a scheme although they can choose to opt out if they desire.
Will my business be affected?
An estimated 1.8 million of small and micro business employers in the UK will be affected by auto-enrolment eventually. If you have at least one employee then you will be responsible for setting up and paying towards their pension.
When does this come into play?
Depending on the size of your company, the date you will need to auto-enrol your staff varies. This date is known as your staging date. For the largest companies, this started in 2012, however it is now the turn of smaller companies to start enrolling their workers. By 1st February 2018, all employers regardless of their size will need to have enrolled their workers in a pension. You can find out the exact staging date for your company by checking the Pensions Regulator website.
Who do I have to offer pensions to?
You may not have to offer a pension to all of your employees, only those that meet a certain criteria as set out by the government. You must enrol all those who:
- Are not already in a suitable workplace pension scheme
- Are aged between 22 and the state pension age
- Earn at least £10,000 in a year
- Work in the UK
Workers who do not meet this criteria can ask to be enrolled into your scheme and if they do, you are required to pay minimum contributions for them. These are workers who are either aged 16 - 22 or between state pension age and 74 and earn more than £10,000 in a year, or those aged 16 - 74 who earn at least £5,824 but less than £10,000.
Those workers who are aged 16 - 75 and earn less than £5,824 can also ask to join the scheme, although you will not be required to make contributions on their behalf.
How much do I have to pay?
The amount you need to contribute to your employees pensions is a set percentage of what is known as their ‘qualified’ earnings. For the 2015/16 tax year, ‘qualified’ earnings are those between currently £5,824 and £42,385. Therefore if you have a worker earning £25,000 per annum, their ‘qualified’ earnings would be classed as the difference between the minimum income threshold of £5,824 and £25,000, which would be £19,176.
Employer contributions are currently set at a minimum of 1% of the employees ‘qualified’ earnings, although this will steadily increase over the coming years. The contribution levels are as follows:
Before April 5th 2018 Employer 1% Staff 1%
April 6th 2018 – April 5th 2019 Employer 2% Staff 3%
April 6th 2019 – onwards Employer 3% Staff 5%
These contributions are the minimum you have to make, however you are of course able to contribute more than these levels if you so wish.
How do I handle the administrative side of things?
If you have staff to enrol then it stands to reason that you will need a pension scheme in place to enrol them in to. There are a huge range of providers and schemes now available, so you should be able to find one which caters to your needs. Inevitably there will be costs involved in setting up an auto-enrolment scheme; however these will vary depending on the size of your company and the amount of employees you have. Some providers will levy an ongoing monthly cost, while others will charge you a one-off fee.
If you have an existing pension scheme in place for your employees, you will need to check that it meets the criteria for automatic enrolment. Requirements for auto-enrolment include not requiring staff to do anything to join the scheme, and not having to choose their own investments.
Small businesses which do not meet their auto-enrolment obligations in time risk being hit with fines of up to £500-a-day. Therefore if you are unsure about meeting your obligations, your best bet is to seek professional advice (such as your local accountant) and support from an expert. Your accountant will be able to steer you in the right direction when it comes to meeting your auto-enrolment obligations.